TY - JOUR
T1 - The economic depreciation of real estate
T2 - Cross-sectional variations and their return implications
AU - Yoshida, Jiro
N1 - Funding Information:
I thank Lorraine Spock and Japanese Ministry of Land, Infrastructure, Transport, and Tourism, and Zillow for providing data. I also thank Ferenc Horvath, Chris Mayer, Iichiro Uesugi, Brent Ambrose, Gilles Duranton, Marcus Berliant, David Geltner, Liang Peng, Amir Kermani, Christopher Palmer, Maisy Wong, Dana Buntrock, and seminar participants at Columbia University, Penn State University, National University of Singapore, Singapore Management University, the University of Tokyo, Hitotsubashi University, Gakushuin University, Policy Research Institute of the Japanese Finance Ministry, the Research Institute of Capital Formation, the Housing Research and Advancement Foundation of Japan, the 30th Asian Finance Association Conference 2018, Bank of Japan, and Hitotsubashi Institute of Economic Research for their helpful comments and suggestions. I gratefully acknowledge research assistance from Yifan Chen, Conor Doyle, and Sergio Garate. This paper is supported financially by the Real Estate Research Institute.
Publisher Copyright:
© 2020
PY - 2020/6
Y1 - 2020/6
N2 - This study analyzes how real estate depreciates in economic value as it ages. The economic depreciation of real estate affects investment decisions by decreasing appreciation returns and increasing income returns. The data show significant cross-sectional variation in depreciation rates for residential and commercial real estate for Japan and residential real estate for the U.S. The depreciation rate is larger if a property is commercial, newer, denser, located in a smaller city, more distant from the central business district, and in Japan. The depreciation rate of structures is approximately 6% for Japanese housing, 10% for Japanese commercial structures, and 1% for the U.S. housing. This study also proposes new methods to correct for survivorship biases. These results serve as essential inputs for the analysis of real estate investment, consumer choice of housing, sustainability, and the macroeconomy.
AB - This study analyzes how real estate depreciates in economic value as it ages. The economic depreciation of real estate affects investment decisions by decreasing appreciation returns and increasing income returns. The data show significant cross-sectional variation in depreciation rates for residential and commercial real estate for Japan and residential real estate for the U.S. The depreciation rate is larger if a property is commercial, newer, denser, located in a smaller city, more distant from the central business district, and in Japan. The depreciation rate of structures is approximately 6% for Japanese housing, 10% for Japanese commercial structures, and 1% for the U.S. housing. This study also proposes new methods to correct for survivorship biases. These results serve as essential inputs for the analysis of real estate investment, consumer choice of housing, sustainability, and the macroeconomy.
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U2 - 10.1016/j.pacfin.2020.101290
DO - 10.1016/j.pacfin.2020.101290
M3 - Article
AN - SCOPUS:85081240597
SN - 0927-538X
VL - 61
JO - Pacific Basin Finance Journal
JF - Pacific Basin Finance Journal
M1 - 101290
ER -
